Establishing credit is a funny thing. It’s hard to get if you really need it, but easy to get if you don’t. In other words, building your credit score in the first place is challenging, but once you’ve done so, you’ll be in good shape. But how do you build your credit score if you can’t get credit in the first place?
How To Build Credit
The number one best way to build credit is to simply make on-time payments to pay down your credit card balances. Even though this is the best way, it is not the only way to build credit. The following examples are also reliable ways to improve your credit score and get you started on your credit-building journey.
- Apply for a secured credit card
- Get a co-signer
- Become an authorized user on another person’s card
- Get a secured loan
- Get a car loan
1. Apply for a Secured Credit Card
This is a credit card that is backed by a cash deposit that you make, equal to the credit limit of the card. That cash acts as a security deposit and stays with the lender for as long as you have the card. You use the card like any other credit card and pay the balance when it’s due.
The difference is that, if you don’t make your payment, the lender has your deposit to protect their interest. But if they have to dip into the deposit, your credit rating will suffer. A secured card is a temporary measure — once you’ve built up your credit, you’ll be able to qualify for an unsecured card.
Building better credit without a credit card of any kind is futile. Apply for a card with a low limit — and just apply for one. Lenders will pay attention to the number of accounts you apply for, so just apply for one to start with. If you get the card, you’re off to a good start.
2. Get a Co-Signer
If someone with good credit is willing to co-sign your credit card application, you may qualify for an unsecured card. The co-signer needs to understand that they’re responsible for paying the bill if you don’t, however.
3. Be an Authorized User on Another Person’s Card
If a family member has a credit card in good standing, they can add you as an authorized user. You will get your own card, and the credit history of the account will be reflected on your credit report. Make sure the card issuer reports the activity of authorized users to the credit bureaus. Have a conversation with the owner of the credit card about paying for the items you purchase using the card and be sure to stick to your end of the bargain.
4. Get a Secured Loan
This is like a secured credit card — you put down a deposit equal to the amount of the loan, then pay the loan according to its terms. Once the loan is paid off, you get your deposit back, plus — hopefully — a shiny new credit score. A secured loan is a credit builder loan and you can typically apply for one through your local bank or credit union.
5. Get a Car Loan
Once you’ve gotten your first credit card, it may not be long before you will qualify to buy or lease a car. When you do, the better credit you have, the better interest rate you’ll get. And if you’re buying rather than leasing, consider getting your auto loan from a bank — preferably one you already do business with — rather than the dealer.
Their interest rate will usually be lower, and you’ll know just how much you can spend before you get to the dealership. This could help prevent you from buying a car that’s more expensive than you can actually afford.
What Goes Into Determining Your Credit Score?
There are five factors that go into determining your credit score. They are:
- Your payment history: 35%
- The amount you owe on all your accounts: 30%
- The length of your credit history: 15%
- Your credit mix: 10%
- New credit: 10%
The percentages are a guide — some categories matter more for some people than others. For example, for younger borrowers, the length of your credit history may be less important than it would be for someone older.
Payment history will always be the most important factor, so make sure you pay all your bills on time. You can’t go back in time, so if you’ve had late payments in the past, start making all your payments on time today.
It will take some time to change things like your payment history and the length of your credit history. But you can take some action that will have an immediate impact on your new credit and the amount you owe on all your accounts.
What Impacts Building New Credit?
New credit looks at the number of accounts you have recently opened. If you’ve just gotten three new credit cards, the issuer of the fourth card you apply for isn’t going to like that. Apply for a single card, and then wait before you apply for additional credit. And if you know you’ll be looking for a car loan, don’t take out a credit card right before you try to qualify.
If you have some cash, you can also impact the amount you owe on all your accounts. Pay off what you can before applying for more credit. But don’t close the accounts. Part of the calculation of what you owe takes into account the amount of available credit you have.
Final Take: Make Sure To Stay On Top of Your Credit
Once you’ve got a credit card and a car loan, you should be in good shape, as long as you pay all your bills on time. Credit reporting agencies will report late payments for your mortgage, car loans, credit cards and so on. But lenders can also ask to see your credit history for things like utilities. So don’t commit to any bills you cannot pay on time, every month.
This means coming up with an accurate budget. Know how much income you have coming in and how much you have to pay out in bills. Be sure to factor in some savings for the inevitable emergency.
FAQHere are the answers to some of the most frequently asked questions about building credit.
- What is the fastest way to build credit?
- The number one fastest way to build credit is to simply make on-time payments to pay down your credit card balances. A history of just making payments on time goes a long way to building credit.
- How do you begin to build your credit?
- There are many ways to begin to build your credit such as:
- -Apply for a secured credit card
- -Get a co-signer
- -Become an authorized user on another person's card
- -Get a secured loan
- -Get a car loan
- There are many ways to begin to build your credit such as:
- How do you get a credit score of 700 in 30 days?
- Getting a credit score of 700 within 30 days depends on your starting credit score and financial situation. Though this amount of rapid change can be unlikely, in order to get a higher credit score within a month, make sure to first check your score and verify that there are no errors. Pay off your debts as quickly as possible and complete your payments on time. You can even consolidate your debt to help you pay it off faster and possibly at a lower rate.
Caitlyn Moorhead contributed to the reporting for this article.
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- Experian. 2019. "Is It Better to Finance a Car Through a Bank or Dealership?"
- myFICO. "How Are FICO Scores Calculated?"